The Challenges of Innovation
Written by: Andrew Swinburne
Today’s modern business climate generally consists of a few giants who got it right, those who played the right cards, made the right financial decisions, and perfected their craft to lead them to the top. Oftentimes, one of those key factors is an open, untapped market that provides explosive, exponential growth to push past early overhead and sunk costs required in building a business. The logic is simple: with no competitors and a seemingly limitless demand to one source of supply, early profit should be easy, and sustained growth very manageable. However, when we look at examples of industry giants such as Amazon, Facebook, and Google, we observe companies that were late to the game, yet still managed to overcome this and beat their early rivals, replacing them as the industry leader. What challenges are these early pioneers facing that makes competition so daunting, and what are these successors doing to take over in a market they did not discover?
One of the main issues facing startups in a new market is a lack of recognition, and making the new idea/product known. Practically, this translates to heavy overhead costs for pioneers in the form of development and advertising. Using Uber as an example, we can see that although, obviously, the seemingly endless demand was there, there was the problem of lack of popularity. This led Uber to take on all kinds of debt and pouring a majority of their initial funds into “making Uber a part of the average person’s daily life”. This idea of spending money on marketing, app development, product development generously in the effort of full saturation in popular culture is not new. Facebook used the same strategy, spending enormous amounts of money to finance getting the word out, and improving everything about the product to make it as easy to use and accessible as possible. Fast forward a couple years down the road to now, Uber is still eating a portion of the cost of every ride in order to get people to use their product, and are no longer viable. However, on the outside looking in, there is now a market infused into most people’s lives that should theoretically lead to infinite profit. To paraphrase, the massive initial overhead involved in getting the word out and creating the actual market oftentimes lead to irreversible costs and losses.
Regulations and unpredictable costs are also something that can take down industry pioneers. Using Juul as a case study, we see a company that thrived on a huge market with skyrocketing demand mainly by being the one name to rise above. This drove Juul to having some of its most profitable years ever, but as of recently they have been met with potential lawsuits and new restrictions that are going to drastically change how this company and others of its kind do business. These regulations are primarily going to cut its target demographic in half and eliminate its most profitable products. Similarly, companies like Lyft and Uber face profit crippling regulations in their home state of California, as our government and society discover issues in these business models and decide on regulations to be put in place. Introducing a brand new product is an inherently dangerous game, as it is new and unheard of. With anything new there will be hiccups and problems, which consistently plague trailblazers in new industries.
This new model seeming to surface in the past 15 to 20 years of one or two companies creating a product or industry we can’t live without, then being overtaken, makes logical sense. Efficiency increases profits, and generally speaking, the fewer the obstacles, the easier it is to make money. Companies like Amazon, Facebook, and Google are all companies that revitalized or revolutionized the industry they are in but, historically, were not the first in the market. The reasoning behind this is clear: these companies have examples to use in finding the most efficient way of doing business, particularly in cutting costs of production and reaching consumers. These companies start with great ideas, then offer a sleek, redefined version of something you liked the idea of, but thought was too clunky or slow to use.
Whereas these early companies struggled primarily in the area of convincing people to use their service, companies companies such as Amazon and Google enjoyed low initial advertising and development costs due to now existing research and technology. This meant focused capital in areas like growth and market research, and inputting more production units to produce a higher volume of product to meet a new skyrocketing demand. Depending on the timing, as well, these companies can enjoy extremely low competition due to higher entrance costs, as one company begins to monopolize. It also helps that, specifically with the companies mentioned here, that the industry primarily only needs one of its kind, such is the case with Google, Uber, and Amazon. It benefits both the consumer and the enterprise to have a one stop shop, where things are made simpler by a lower number of competitors.
In short, we can contribute the sometimes short-lived success of companies in new markets to the plethora of costs that come with starting an idea completely from scratch. Generally, with good ideas, consumers do the hard work of increasing exposure and creating buzz that surrounds new, pioneering ideas. However, it’s not always that easy, and the markets can take a lot of convincing, allowing market saturation and new competitors to capitalize on the weaknesses of these early companies.